The U.S. property and casualty industry's third-quarter statutory surplus could shrink as much as $42 billion from the beginning of the year, according to projections by a global consulting firm.
To arrive at the estimated 8-percent dip, Towers Perrin took into account the clash of equity and credit-related losses on asset portfolios; catastrophe losses resulting from an active hurricane season; and an anticipated spike in D&O liability claims. Moreover, the firm says that if the stock market doesn't recover from steep losses precipitated in recent weeks by the financial crisis, the surplus decline could approach $80 billion -- or 15 percent -- by the end of the year.
Reported quarterly by U.S.-based regulated insurance companies, statutory surplus is a conservative measure of the capital cushion held by insurers to protect policyholders in the event of adverse results. Various trade associations compile and publish pertinent industry-wide figures.
Other findings indicated that the projected industry combined ratio for the third quarter is 116.6 percent, producing an underwriting loss of $18.5 billion. Contributing factors are large catastrophe losses, continuing heavy claims for the mortgage and financial guaranty specialty insurers, emerging D&O claims, and a general deterioration in price adequacy.
"While losses are widespread, we aren't expecting any company failures," said Stephen Lowe, managing director of Towers Perrin's global P&C insurance practice. "However, some downgrades from the rating agencies are likely."
Lowe also emphasized the need for a solid risk management culture, given the current financial climate.
"This is, however, a wake-up call for all companies," he said. "Risk management is now more than ever an imperative. Recent failures are examples of failures in risk management, not of risk management. The magnitude of these failures makes the need for a strong risk culture, deployment of tools to support risk-based decision making, clearly stated risk appetites, and current economic capital measurement paramount."
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